Volvo Car AB

STO:VOLCAR B

Earnings Call Transcript

[Ronojoy Banerjee, executive]

Good morning, and, welcome to the Presentation of Volvo Car's Full Year 2022 and Fourth Quarter 2022 Financial Results coming to you from our headquarters in Gothenburg. My name is Ron, and I'm joined this morning by our President, Chief Executive, Jim Rowan; and our Chief Financial Officer, Johan Ekdahl. At the start, Jim and Johan will walk us through our performance, and thereafter we'll throw it open for a live Q&A. You can participate in two ways. Either you can send in your questions via the chat window that you should be able to see at the bottom of your screen, in which case I will then read out the questions -- your questions to Jim and Johan, or you can also participate by using the phone lines. So please follow the link at the bottom of your screen or simply just use the QR code.But I'll come back with more information how you can participate at the start of the Q&A. But for now, the floor, Jim, is all yours.

[James Rowan, executive]

Thanks, Ron, and welcome everyone to this -- the fourth quarter and full year review 2022 for Volvo Cars. 2022 was an acceleration of our strategy and navigating some challenges, and we made some good headway. 2022, fully electric share of sales rose to 11% versus 4% last year. If we isolate the fourth quarter, that rose to 18% versus 6% in Q4 2021. And of course, we had the global reveal of the Volvo EX90, our first fully designed electric platform car. We divested the rest of our assets in Aurobay to allow us to fully focus on our electrification journey, and the battery plant and engineering joint venture with NOVO, Northvolt was announced for here in Gothenburg.Our new fully electric assembly plant in Slovakia was also announced. And of course, Polestar, our affiliate, was listed on the NASDAQ Exchange in New York. But it was also a year filled with challenges, energy crisis and rising inflation, higher cost for raw materials, semiconductor shortages, forcing spot buys and logistic disturbances.The year started with this terrible war in the Ukraine, which, of course, is still with us today and likely to cause disruption going forward. The continued COVID-related lockdowns primarily in China in 2022 forced plant closures and shortages of some key components, and those were really the key challenges that we faced through that year.Now we take a quick look at full financial -- full year financial results, and Johan will take us through this in a lot more detail just shortly. But if we start with retail sales, they were down by 12%, yet, because of a high pricing and also the [ CarMax ], our revenue was up by 17%.EBIT margins compared to 2022 -- sorry, compared to 2021 were up at SEK 22.3 billion versus SEK 20.3 billion in 2021. And of course, we remained fully focused on our mid-decade ambitions. We aim to be at 1.2 million cars sold run rate as well as 50% electric sales, 50% online sales, 8% to 10% EBIT margins and a 40% CO2 reduction when compared with our baseline in 2018. We remain fully dedicated and focused on those mid-decade ambitions.Perhaps, one of the most important things that we saw in 2022 was the validation of our electrification strategy and that sharp rise in recharge and BEV sales. If we isolate this to Q4, we can see that BEV sales at 18% are the highest ever, and total Recharge sales at 41%, again, the highest ever in the history of the company.And in fact, if we isolate just December as a month, we can see that BEV sales actually increased to 20% of our total sales, and this bodes well for the future, because we start to see that now emanate out towards some markets across the world, from Latin America to Southeast Asia and to here in Europe.We've listed here the top 10 markets across the world where we see a high adoption of Recharge and that includes BEV as well as, obviously our plug-in hybrids. And I think that bodes well for us as well in terms of the future and the investment strategies that we've made, as we start to see more and more of those countries move higher into that electrification journey.With that, I will hand over to Johan, who will take us through the financials and some more details.

[Johan Ekdahl, executive]

Thank you, Jim, and good morning. Some more details then on the financials. In the fourth quarter, we saw an increase in retail sales volumes of 11%, which is then on the back of the improved production situation towards the end of the year, where December actually was our best production month ever, with more than 72,000 cars in production. Revenue with a solid growth of 31%, taking us to SEK 105 billion in the quarter, also proving that we still see a good demand and have been able then to have a good mix of cars and healthy pricing. And on top of that, we've seen a tailwind on FX, on revenue, and also some contract manufacturing contributing to that growth of 31%.On the EBIT side, Volvo Core without JVs and associates, we are at SEK 3.9 billion or 3.7% for the quarter, which is not where we want to be. But we have had, which we will go into more detail later, still very elevated cost for raw material. We have been buying semiconductor still on the spot market, et cetera. So we are at a deteriorating margin compared to last year.Cash flow, SEK 9 billion of free cash flow for the quarter, which is then on a very healthy level, and almost on par with the 2021. On revenue, a little bit more in detail. We see, of course, a positive effect from the increased volumes in the quarter. We do see still positive effects from mix and pricing. We have a very good tailwind on FX, which is then on revenue, especially on the U.S. dollar.And we also have effects from our contract manufacturing of cars to Polestar, taking us then -- again, 31% growth and SEK 105 billion in revenue in the fourth quarter. On EBIT, we do see positive effects. We have increased volumes. We have good sales mix and pricing on the back of the continued healthy demand.On FX, it's actually slightly negative on EBIT due to the fact that we have euro and other currencies on the cost side offsetting the effects on revenue from -- especially U.S. dollar. And then we have the negative effects from the increased raw material prices, especially high on lithium still on our BEV cars, but also raw materials in general, still at elevated levels. We see increased cost for freight. We're buying semiconductors to some extent still in the spot market, which then takes us to SEK 3.9 billion or 3.7% in the quarter, including JVs and associates, SEK 3.4 billion or 3.3%.Our BEV margins still at lower levels at 6% compared to 5% in the previous quarter. We have had some positive effects from sales of CO2 credits. We also see that we have a good development of the revenue per car in absolutes, an increase both in revenue and in gross income per car compared to the third quarter, although still offset by then the elevated prices for lithium and raw material, and also some effects from the high U.S. dollar rates in the prices for the batteries.We are coming out into 2023 with a very solid liquidity level. We are at SEK 84 billion, including undrawn facilities on the back of the SEK 9 billion positive free cash flow in the fourth quarter. We have been slightly positively impacted in the fourth quarter due to the fact that some of the so-called structural investments already announced in connection with the IPO. Some investments, especially in China, have been pushed forward into 2023, awaiting regulatory approvals, et cetera.So there is a time phasing that has had a positive effect in the fourth quarter as well, although, also the underlying operational cash flow is at a good level towards the end of the year, taking us to a very solid liquidity level.If we look at the full year, it's, to a large extent, the same story as in the fourth quarter. Volumes for the full year then down 12%, as we saw previously. But, despite that, we've been able to increase revenue 17% to SEK 330 billion, taking us for the first time in the history of the company above SEK 300 billion in revenue, affected by then still good mixes, good pricing, FX and contract manufacturing, and we'll come back to some more details shortly.EBIT, Volvo Core, excluding JV and associates, SEK 17.9 billion for the full year or 5.4%, including JVs and associates, SEK 22.3 billion, but then, also a large effect from the Polestar listing in the second quarter. Cash flow, minus SEK 6 billion for the full year, almost on par with last year, and then, again, taking us to that we do have a healthy liquidity level at the end of the year.So, as Jim showed previously, we are really seeing a good increase in our share of electrified cars, 18% of fully electric in the fourth quarter, 41% Recharge cars. And then it's an important proof point towards our mid-decade ambition of a CO2 reduction of 40% per car. I mean, decade, whereby the increase per share will be the most important contributing factor due to the fact that the tail pipe emissions then will be reduced. So we are fully on track towards that ambition.Again, revenue for the full year at SEK 330 billion, 17% increase, despite lower volumes compared to the year before. Sales mix, pricing, again, proving that we have seen a good demand during the year and been able to price our cars better. We have a positive FX effect, especially from the U.S. dollar in revenue, and then contract manufacturing on top of that, taking us then to the SEK 330 billion.On EBIT, we see also there positive effects from our mix of cars and our pricing. FX, slightly positive, but again, euro and other currencies on the cost side, offsetting to a large extent the positive revenue effect from the U.S. dollar. And then, again, the negative effects from the increased raw material prices, lithium, especially, but also on a lot of other raw materials, spot purchases of semiconductors in order to save cars in production and increased freight costs.So even though we have been quite successful in our mix and pricing effects, not fully, but to a large extent, offsetting the increased cost, but not to the full extent, taking us then to the SEK 17.9 billion or 5.1% for the full year, 22.3% or 6.6%, including JVs and associates and the positive Polestar listing effect.So, with that, I will leave back to Jim to take us through the final summary.

[James Rowan, executive]

Thanks, Johan. So, in summary, 2022, overall semiconductor situation and freight cost is better and the easing of the COVID restrictions and lockdowns, we should see a positive impact as we roll forward into 2023. In 2022, the second half production improved by 15% compared to the first half production. And again, that bodes well for us as we pour into 2022. And as Johan said, December was our highest production month to date. We've refocused on cost and efficiency, and this is to help not just drive the 2023, but also our mid-decade ambitions as that relates to EBIT. And in 2022, the European price actions will further materialize in Q2 -- in Q1 rather, 2023, due in part to that sizable order book that we accumulated throughout the course of last year.If we roll forward to 2023, despite the macroeconomic situation, our execution engine continues to improve. Our order book remains robust and healthy demand globally. We expect solid double-digit growth in retail sales compared to 2022 to '23. And we intend to also increase our BEV volumes resulting in that percentage growth of BEV.The global unveil and supply of our new fully electric small SUV is a highlight for us this year, and we look forward to announcing that to the world later this year. At the same time, we will also transform the U.K. to become our first fully direct consumer-facing market, and that's something that we're looking forward to as it has so many proof points for us as a business.And of course, we will start the construction of our new Northvolt facility, one of Europe's largest high-tech battery manufacturing plants.And with that, I will hand over to Ron, who will take us through the Q&A session. Ron?

[Ronojoy Banerjee, executive]

Well, thank you very much for that, Jim. So we are all set now to roll the Q&A session. As I said, you can participate in the Q&A session in 2 ways; either you can send in your questions using the chat window that you should see at the bottom of your screen, in which case, I will then take the questions to Jim and Johan; or if you want, you can also participate via using our phone lines. Please use the QR code that you see on the screen. [Operator Instructions] But to get the Q&A session, let me also invite up here, our Head of Investor Relations, John Hernander. Good morning, John.

[John Hernander, executive]

Good morning.

[Ronojoy Banerjee, executive]

All right. So let's take the first question then, and this comes in from Henrik Christiansson from Carnegie. There have been a number of price cuts on BEVs from other OEMs in recent weeks. How do you see that development? And how does that impact your ability to get the necessary price realization through?

[James Rowan, executive]

Yes. So -- and despite the high inflation and the high energy costs, we see demand for our products on a global basis, incredibly high, especially on our BEV products. And that bodes well, obviously, not just for our strategy to become fully electric and to [ increase ] electric sales, but it bodes well as well for the strength of the brand and our pricing within the market. So we don't have any pressure points that we see that would require us to reduce our pricing anywhere in the short term.

[Ronojoy Banerjee, executive]

We can take one more question from Henrik. Could you explain the change in the accounting policy for the Polestar Holding, impacting JV and associates income? What is the forecast profit loss based on? And how will you treat actual versus forecast outcome in the P&L in future quarters? Maybe Johan?

[Johan Ekdahl, executive]

Yes. And since Polestar now being a listed company, we need also to adhere to certain insider regulations. And we are reporting as of now earlier, our quarterly results compared to Polestar. So it's not really -- it will not be any material effect in our figures at all. But rather than taking in the actuals, using the equity method, we will take in, let's call it, a well-informed forecast rather. So there might be small adjustments in the quarter afterwards if you're referring to the difference between actuals and forecast.But I think we will have the ability to do that in a way that I foresee very, very insignificant effects in our P&L from this change.

[Ronojoy Banerjee, executive]

Let's take in a call then. The first caller is George from Goldman Sachs.

[George Galliers-Pratt, analyst]

[Audio Gap] bodes more than 200,000 units and a very strong finish to the year, it sounds like. When we think about 2023, is there any reason why you won't be able to achieve this level of production on a quarterly basis through the year? And then a second question just on the financials for Johan. Obviously, it was a strong quarter in terms of volume and top line. But when we look at the profitability, ex the JVs, and we also strip out the benefit that you get from capitalizing a high level of R&D net of amortization, it looks like the earnings were only around SEK 500 million or around a 50 basis points margin. Obviously, this is in a very strong end market environment in terms of pricing and mix.So can you give us some insight into what is holding back the profitability at Volvo Cars today? Is it just the raw material and high semi costs? Or are there other important items? And how do you see this easing over the coming 12 to 24 months?

[James Rowan, executive]

George, I'll take the first part, which is on the production side. And the real positive that we see in the tailwind that we're already starting to see through the fourth quarter is, of course, the COVID lockdowns in China were a big part of the disruption factors for 2022. In fact, that's where most of the supply disruptions and plant closures came from. Because we have -- a large supply base in China affected not just the manufacturing plants in China, but affected our manufacturing plants on a global basis. And with the easing of those lockdowns in China now, by and large, it looks like that those won't reoccur in '23. So that's the biggest single [ huddle ] and the best tailwind that we can find.And in addition to that, the semiconductor situation continues to ease. That doesn't mean to say it's gone away. We'll still see small disturbances and we will need to play in the spot market in order to get some of those semiconductors, I would imagine all the way up through the half -- through the first half of the year.And then hopefully, we'll see that slide away as well in the second half of the year. But those are the 2 main things which give us the confidence that we can grow the production in line with our forecast.And we saw that actually manifest itself to some extent in Q4 with the highest ever production month of around 72,000 units.

[Johan Ekdahl, executive]

Yes. And on the question on the profitability, I would say that, to the absolute main part of the deterioration in margins is due to, as you say, the elevated prices for raw material and also other costs for semiconductors, spot buys, which has, on the other hand, saved quite a lot of production, but also comes with the cost, and then also increased freight costs, et cetera. On top of that, I would say that there is also actually a volume effect, which means that we have had this supply and production disturbances during the year. And even though that -- the volume, there is also an effect that if we would have had higher volumes, the profitability would be slightly higher because, if you put it simply, not all cost in gross margin is variable either. So I would say, on top of the elevated raw materials, et cetera, there is also a volume effect, but in summary, raw material being by far the biggest effect.

[James Rowan, executive]

And I guess we can also add to that what we said during the IPO that, when we sell more BEV cars under the current generation of platforms, it will be sort of a dilutive effect on margins. But when we introduced the new platforms in the years to come, we will get closer to the BEV, a nice parity. But that has an effect on the profitability in the fourth quarter as well.

[Ronojoy Banerjee, executive]

Let's take a question that's coming in from -- few questions from the media then. Let's take a few of them. How is the launch of the Volvo EX90 been received by the market? How much do you see that car model take part of the 2023 financial results? So maybe on just the feedback in the market?

[James Rowan, executive]

The feedback has been really -- in fact, we opened that up for pre-orders and we set ourselves some internal targets that we were hoping to achieve and we blew through those targets pretty well. So the demand for that product is high, which we had expected, but even beyond our expectations. So that's great. And then, of course, the production of that car, as we announced earlier, that wouldn't happen until well into the fourth quarter. So supply this year will be limited. And therefore, the effects on our 2023 results on the EX90 will be limited. However, let me take the opportunity as well, just to bring in place the new small SUV that we haven't announced yet officially.But we'll announce that later on this year, probably around about the mid part of this year. And as we announce that, that car actually will be in production as well by the end of this year. So both of them, the combined effect will still be quite small in 2023.But as we put into 2024, then we'll have 2 brand new cars. And the nice thing really for that as we top until the range, so we've got the EX90 at the top of the range, fully electric and in full production by 2024. And of course, this brand-new SUV, which is going to take up a new position in the market for us, I think will bring in different demographics for us as a brand, and that again, will be in full production by the end of this year as well. So we start off then with rather just 2 cars, which we have this. We're doubling up to 4 cars by the end of the year.

[Ronojoy Banerjee, executive]

I'll take 2 quick questions that we got in from -- [ posted ] as well. One is -- this is from [ Vladimir ]. Is it realistic to stick to the goal of 1.2 million cars sold mid-decade, considering you sold a bit over 600,000 last year?

[James Rowan, executive]

Yes, let me take that. So, first of all, the clarification point on that is that we had said that, by the mid-decade, we expect it will be a 1.2 million cars. That's a 1.2 million run rate by the mid-decade, okay? So what drives that? I think some of the -- maybe the narrative has not quite picked up that this new smaller SUV, which will be a lower price point than our current BEV sales or BEV cars, will allow us to pick up that new demographic. There won't be in a major [ way ] cannibalistic to our existing sales. So that goes on top. We'll have obviously the C40 -- the XC40 which is in play. And we'll have the EX90 in play. And we've already said that we'll have one brand-new production fully electric car [ at play ], or we'll release that every year for the next 3 or 4 years.When we get to that mid-decade, we have 5 or 6 fully electric cars, fully built on our new electric platforms, all in play at the same time, especially the new smaller SUV, which plays to a different demographic, and we think that will be a nice volume car for us.When you add that together, then I think you have a really credible story towards getting to that 1.2 million run rate by the mid-decade, and that's how those numbers add up.

[Ronojoy Banerjee, executive]

And one more question from him then. How will the Swedish organization and the employees in Gothenburg be affected by the cost and efficiency optimization plan? Maybe I'll turn to you again, Jim, for that one.

[James Rowan, executive]

Yes. That's a good question. So I mean, I think it behooves every business right now to be seen how do they make sure that they're driving efficiency through their entire organization. We obviously do that on a day-to-day basis. We've ramped that up to make sure that we're fully fit for the future. And a good example of that is, we have divested all of our Aurobay assets, for example, so that we can fully focus our investments in the future, which we, of course see is full electrification the electrical propulsion systems and all the new technologies that we need to be -- to remain relevant in this new emerging EV world.And that's a good example where we're really looking at our cost base in every part of the business and saying, okay, this is something where we think we think we can take out cost in order to fully invest in the future. So it's a sharpening up -- It's not a big separate program. It is a sharpening up of efficiency and where we spend our cost.

[Ronojoy Banerjee, executive]

Let's take a caller now. Let's take Matthias Holmberg from DNB.

[Mattias Holmberg, analyst]

When I spoke to your IR team earlier, I understood that you had a quite material balance sheet FX revaluation effects that impacted the foreign exchange line in the EBIT bridge in the quarter. But I noticed that you didn't mention this during the presentation. So I would want to, first of all, confirm if this was the case, and perhaps clarify if there were any issues here?

[Johan Ekdahl, executive]

Yes. On FX, if we look at the full year or the quarter as well, we are -- on EBIT, we have quite limited net effects on FX, although we have a big positive effect in revenue. And that's, of course, different parameters. You have the U.S. dollar mainly affecting the revenue. We have the -- mainly euro and other currencies affecting the cost side. We have effect of hedges included in that number, and we also have balance sheet revaluations.But I would say, over the full year, on the net side, I would say the biggest effects are the change in U.S. dollar on the revenue side and the cost effects of the euro on the cost side. Then there are other corresponding effects and that -- they can, of course, vary somewhat month-over-month, quarter-over-quarter. But I would say for the full year that those are the main effects.

[Mattias Holmberg, analyst]

And would you say it was a material headwind or tailwind in the fourth quarter, particularly from revaluations?

[Johan Ekdahl, executive]

I would say it's not that significant in the fourth quarter. I would say that with the main effects in the fourth quarter as well, it's the positive U.S. dollar year-over-year on the revenue side and euro, and partly hedges on the cost side, which then takes us to slightly negative, but almost a wash in total in the quarter from currency.

[Mattias Holmberg, analyst]

A second one, if I may. Can you tell us roughly where the BEV gross margins would have been without the currently elevated lithium prices? Or rather perhaps, how much of the COGS for the big segment that relate specifically to the batteries at this point? And also, if there were any positives impact, in particular to the BEV gross margin from the credit sales in the quarter? Or did that sort of impact the ICE segment or the common side on gross profit, please?

[James Rowan, executive]

Yes. On the second question, the credit sold, it has a slightly positive effect in the quarter, but it's not that huge. It's mainly 1 percentage point or something like that from the credit sales. On the lithium prices, I would say that if we compare 2021 with 2022 Q4, the main part of that deterioration for sure is lithium prices.

[Mattias Holmberg, analyst]

And just to clarify, the impact from the credit sales, did that impact the BEV gross margin or the ICE gross margin or the common?

[James Rowan, executive]

The main part affecting the BEV gross margin. But since we also have credits for certain, we have -- there is also a slight effect on the non-BEV cars, if you will, but the larger part is in the BEV. It was not that huge amount, so -- but it's -- yes.

[Ronojoy Banerjee, executive]

We can take another question from the media then. This is from Erik [ Golrang ]. Will there be a bonus payout to employees this year?

[James Rowan, executive]

Yes. There will be a bonus payout for our employees this year.

[Ronojoy Banerjee, executive]

We have a question from Automotive News. Do you plan any job cuts as part of the cost optimization plan in '23? If so, where globally will these cuts come from? Jim?

[James Rowan, executive]

No, we don't plan any job cuts. In fact, if you look at our electrification journey and our growth ambitions, and also this transition to new technologies, we're going to be -- we're pretty confident we will keep all the people pretty busy for the next few years as we get the new cars ready for production and ready for prime time, the new SUV or EX90 -- the small SUV, the EX90. And of course, one new car every year for the next 2 or 3 years, I think, is going to keep our people pretty engaged and pretty busy.

[Ronojoy Banerjee, executive]

This is from Charlie Martin in Autocar. You noted in the full year report that the active subscriptions increased 49% compared with last year. What has driven this growth? And how do you see it developing through 2023, the subscription business in general?

[James Rowan, executive]

I think really what's driving the growth in subscription is that we're in a new phase where people are looking for different ownership models or different user models for cars and next-generation mobility. And I think it's great that we're an early adopter. And that all the way from Volvo on Demand, which allows you to enjoy the benefits of having a car for a very short period of time, or subscription base for months or a short-term basis. It's going to be a new thing that is here to stay, in my opinion.I think it will accelerate. And I think if I go back to the small SUV, when we release the small SUV and we put that on a subscription-based ownership model, that's going to allow us really to talk to brand new customers we have never spoken to, for the first time.In many cases, Gen Z, who are coming into the car market for the very first time, because it makes it affordable. The price of that car is going to be lower, of course. And then, when you add subscription-based ownership, you're only setting it up for,say a minimum of 3 months.So I think it's just a new addition to how this next generation of car owners who want to enjoy that product.

[Ronojoy Banerjee, executive]

Let's take a caller then. This is Jose Asumendi from JPMorgan.

[Jose Asumendi, analyst]

A few questions, please. Thank you for the disclosure on the gross margin between ICE and BEV. ]. Definitely, I think you're leading the discussion here amongst the OEMs. Can you, Jim, maybe provide us some clarity, how do you expect to move those gross margins on that higher -- in the coming years? And what are the sort of biggest levers you're thinking to move to improve the profitability there?Second for Johan, can you [ steer ] a little bit more the SEK 13 billion headwind bucket that you have for the full year? Could you just give us some breakdown of the biggest buckets behind this SEK 13 billion, and whether you were expecting at the beginning of the year, maybe to offset this category with price mix?And then, final one, CapEx R&D. Can you give us some steer for '23, how should we think about CapEx R&D, how much higher is it going to go versus 2022?

[James Rowan, executive]

So yes, right now, what we're seeing in the market is very encouraging for us. We've managed to move our BEV sales from basically 4% to 11% year-over-year. And if you isolate the fourth quarter, that goes from 6% to 18%, which is a three-fold increase in the space of a year, despite supply chain disruptions, which hit BEV sales or BEV supply more than other supply.Actually, when we isolate December within the fourth quarter, we see that, that actually increased to 20% in BEV sales. And that's -- so that direction and the adoption of electrification in our customer base is great.The one headwind that we have, of course, is this high price of lithium. But -- so how do we get that? Now, all of our intelligence tells us that we'll start to see more supply come in on lithium, not just the lithium mining, but also lithium processing. And that's part of the thing that's driving the price up as well, that lack of supply.We'd already in discussions with mines and with processing factories in order to get direct access to that at more predictable costs. But there's another part of this to play out as well, and that is battery chemistry and battery technology continues to increase, or the adoption of new technologies like [Audio Gap] LFP technology. That is going to take our cost anyway, and/or it's going to extent range, which means there's less sales or reduces costs in that affect.And all of these technical benefits that we'll start to see over the LFP technology and certain licenses, and you'd move away from MMX and MXC technology, then, of course, that further reduces cost as well.And may be the biggest thing for us is, this joint venture that we have with Northvolt, is double-headed. One is in production. So again, we're going to take our production costs of batteries because we're going to understand that middle man, if you will.The other thing is, the JV with Northvolt is on technology, and that is really going to allow us to understand all of that spectrum of battery technology from prismatic to pouch to cylindrical, different anode and cathode materials, different electrolytic chemicals and so on.And when you add all that together, I think you're going to start to see the meaningful cost reductions across the BEV-to-ICE comparison. I still expect to get there by 2025, BEV to ICE parity. I'm confident or more so that we'll get there in the '25 time frame. Hopefully, that helps answer the question.

[Jose Asumendi, analyst]

Maybe the next one on headwinds then?

[Johan Ekdahl, executive]

Yes. On the SEK 13 billion you're referring to for the full year, I would say, if you simplify it, it's to a very large extent, a couple of things. It's -- the main part is raw material increases, raw material prices. That's by far, biggest part. On top of that, we also have increased costs or payments to certain suppliers, which, to a large extent, also are raw material cost driven, if you will. Then we have had these supply constraints, especially on semiconductors, where we have been buying semiconductors in the spot market, which also is a part of that.That has, of course, been a good business case, if you will, because it has saved quite a substantial amount of cars in production, but it has also, of course, come with a cost. Then we also have increased cost of logistics. And also, you could say, disturbances in the production due to the constraints we've had, which also, of course, comes with a cost, where it's more difficult to plan.So those, I would say, on a net basis is the -- sums up to this SEK 13 billion, of which the by far largest part is driven by raw material prices.

[Jose Asumendi, analyst]

And on CapEx, please, if possible?

[Johan Ekdahl, executive]

On CapEx, we will increase our CapEx in the coming years. We will have large investments, both in development on new architectures, new car models coming up, one each year, at least going into the mid-decade, and also on our production footprint, the Kosice plant in Slovakia, the joint venture with Northvolt and Gothenburg. So I expect CapEx to increase, although we will see that on the back of a growth, which means that the relative share of CapEx as a share of revenue, if you will, I would not expect to go up that much.

[Ronojoy Banerjee, executive]

This question comes in from Agnieszka. How long and how large is your order book? That is how much of your projected production for 2023 is covered by it?

[James Rowan, executive]

Well, we don't disclose the size of the order book. What I can say it's still very high, on almost record high levels. So of course, it do cover a part of the sales into 2023. When we now see the improvements in the production system, the order book will come down because, I mean, it's positive that we have a large order book from a demand perspective. But we also have long delivery times to our customers, which we, of course, aim to reduce when normalizing production. So the order book in total will decrease during the year, but -- and we will not comment on the exact size of it.

[Ronojoy Banerjee, executive]

Anything, John, you would like to add on this?

[John Hernander, executive]

No. I think that the order book remains of good quality. We don't see a big change in cancellation rates whether they are on normal levels relative sort of the order book size.

[Ronojoy Banerjee, executive]

This question comes in from [indiscernible]. Does Volvo still feel that they will be fully electric by the set year after there have been hikes in lithium prices and gold shortages globally? Maybe Jim?

[James Rowan, executive]

Yes. I mean, this is the -- the industry is in transition. And the problem is, when an industry is in transition, especially when it's a technology transition as well as some of the other things that are happening at the same time, it looks like the industry is going to transform at a linear pace.That's what it looks like. But then when that technology becomes more mature, when cost comes out of the equation, when the friction factors or things like charger, infrastructure and range is start to be eliminated, then you hit that inflection point.And when you hit that inflection point, the gradient of the curve goes up very, very quickly. The big problem with industry transition is, if you don't invest ahead of the curve, then you miss that inflection point and you're not ready for when the market changes.We're investing ahead of the curve. Yes, right now, the only real headwind that we've got is the price of lithium. But we see globally -- last year, we saw that new BEV sales increased by 61%. ICE sales felled by 15%.I mean, that's a big data point. That's telling you that the market is moving towards electrification and you best get ready. And you're going to have to cope with some of those increased prices right now with lithium, which we think will die away.We think that new battery technologies will help reduce the cost of batteries. And we think we'll get to price parity by 2025, which really is when I think that inflection point kicks in and the market really goes, not quite exponential, but the market goes towards a much higher grading, towards full BEV adoption.We've seen it. I mean we've seen that happen in places like Norway where 80%, 85% of every new car sold is now electric, and we've actually seen it in some of our markets as well. We showed in the slides earlier, our top 10 markets that are now above 80% either Recharge or fully BEV, and that's just going to continue.So do I think we'll get the right strategy? That was a long answer to a short question, I guess. But, yes, I absolutely do think we'll get the right strategy. And I think we've been bold enough for us to invest ahead of that inflection point, which we know is going to come.And I think if you're waiting to say, well, I'll try and hedge both BEVs. I'll keep investing in ICE and I'll keep investing in BEV, then, that's a difficult -- I think that -- and I think you then risk missing the market, and we don't want to miss the market.

[Ronojoy Banerjee, executive]

Let's take another caller then. We have Daniel from Bernstein on the phone line.

[Daniel Roeska, analyst]

Jim, you maintained your mid-decade guidance. And I know you said before that the decade may not mean 2025. Could you elaborate right now what is keeping you from providing interim steps between where you are today kind of with quite a gap in volumes and margins to that mid-decade ambition, right? So what are the interims that's how you're thinking about the shape of volumes and margins as we head towards, I'm going to say, 2027?And then, for Johan, can you give us some color on how you would affect the moving parts in '23? You've already commented on the cost per car or the evolution you think on the COGS side. But in your mind, kind of what's the upside on your exit rate from December, which I guess was pretty low? What are the moving parts you point us for -- in this year? And can you give us a sense of where you hope to end up by the end of the year?

[James Rowan, executive]

I just come back on your first point. So we've said -- we've already said and we said earlier today that we expect to see strong double-digit growth. I think that's your first proof point. As we go through the course of this year and we release our volume numbers on a quarterly basis, then you're going to start to see that come through. So we know demand is strong. We know we have a strong order book. Where we were constrained on growth last year was basically on the supply issues, are in COVID, around some of the disruptions on semiconductors and so on, but we have that pent-up demand.And we don't see as [ join ], we need to -- we don't see any significant order cancellations. So we just -- we extrapolate the demand with our supply engine. And we can see we can get to that strong double-digit growth. That's going to be your first proof point at the end of 2023 and our move towards those mid-decade ambitions of a run rate of 1.2 million cars, which is obviously 100,000 cars per month, And. can we reach thatNow the fact that we are -- we made 72,000 cars in the month of December, allows us to -- allows us the confidence that we can get there. Remember as well, the market is moving towards electrification. That's where the growth is happening 61% up versus 15% then on ICE. And we will have the 40 -- the C40, the small SUV, we'll have the big EX90 at the top of the range, and then we'll release a brand-new car every year for the next 3 or 4 years.So by the time we get to that mid-decade, we're going to have 4, 5, 6 probably cars, and brand new, fully electric in a market which is now much more adopted to electric with filled core computer technology, and that, I think, is the roadmap towards that ambition.

[Johan Ekdahl, executive]

And on your question on the moving parts, so to speak, or in 2023 on the margins. We don't specifically guide on profit margins. So this will be more of a generic answer. But we will -- I think 2023 will play out sort of a gradual change. We are going into 2023 still on elevated price levels for raw materials, especially lithium, but also in other cases. And we also still see, even though it has improved significantly, disturbances in the supply chain. So we are still buying semiconductors in the spot markets, et cetera.I think what we believe is that, gradually during 2023, raw material prices will come down, especially with the exception of lithium, which is where the timing might be somewhat more uncertain. But also there we believe that the intelligence that we have, the reports that we get, et cetera, indicates that lithium prices will start to come down already during the second half of 2023, although that timing might be somewhat uncertain. In other raw materials, we will see a decline during the year due to contractual indexation, et cetera. So that's one part.And also, I think that the supply chain when it comes to semiconductors will -- is already improving. We see that in the increased production volumes. But we believe that will also gradually improve over the course of 2023, especially in the second half.So I think -- and also then, as I said before, there is also volume effects of -- in the increased volume. The double-digit growth that we will have during the year will also have an effect on this.So with that said, I think there will be a gradual improvement during 2023 without saying any specific number.

[James Rowan, executive]

Maybe in addition to the comments on the 1.2 million, I mean, that's capacity that we have today. So what you want to talk about CapEx is to secure the growth beyond the mid-decade. We have the -- sort of the capacity in place to reach 1.2 million in the current facilities.

[Daniel Roeska, analyst]

I think maybe what I'm wondering if I could offer those 2 answers together, Jim and Johan, is, you have a plan, you're executing on it. I think it's well understood. You have a good grasp of the business. And so, what's been the discussion in the Board? What's keeping you from providing some more guidance figures to the market, be it for '23-'24 kind of interim steps, that may help investors kind of range the shape, if you will, between now and then? I think that's what I'm asking, right?But what's the decision -- what are the reasons for the decision that you don't feel comfortable at this point kind of sharing a few more guidance either?

[James Rowan, executive]

Well, partly, it's just a positive -- we'll decide to adopt. But really as well, if you look at the -- as we sit here today, and we wind back the clock a year from now, the Ukrainian war had started. And that in itself is a massive data point. There's a lot of disruption still going on. We still have inflation costs. We don't really know what's going to happen with the Fed. We've got -- there's rumbling war in the Ukraine. We don't know what turn that's going to take. That could get a lot worse before it gets better.We've got global economic uncertainties in terms of energy prices and energy security, and we've got global uncertainties in terms of overall trade and where the tariffs start to go up. So now you have a tax tariff. If you manufacture a car in China and you sell it to the U.S., you have a 27.5% tariff cost.You never had that a couple of years ago. So I think it behooves us as a public company to say we're not in control of all of -- could be eventuality. So to give far out guidance, we'd seen at this particular point in time, given the disruptions that we've already seen in the last couple of years and what's likely to continue for the next year or so, I think it behooves us to be conservative in that approach.

[Johan Ekdahl, executive]

But we also get a lot of questions, especially on the EBIT margin target. So sort of as a sneak preview, we will have an update throughout the year. Capital Markets up, that where we address some of these topics, and hopefully clarify it a little bit more on the building blocks.

[James Rowan, executive]

Maybe just to pivot on that point. So, the industry is in transition, okay? We're an early mover and we hope to get that early mover advantage. We're already seeing some of the benefits of the early mover advantage where we grew our BEV sales by 3x within a year in a very turbulent market. We're making the investments to put our new BEV cars. We're not trying to say, well, let's release 2 ICE cars and a BEV car, or like we're all in on BEV, because we think the technology is better. It's much more efficient. And an internal combustion engine is only 30%, 35% efficient and an electric propulsion system is over 90% efficient. There's no tailpipe emissions of course, which is a massive benefit, and our customers really care about that. There's no noise. There's no vibration. There's less servicing cost for our customers.Yes, we've got some headwinds right now in terms of lithium, but that's pretty much the only thing that stands in the way of full-scale adoption. The other thing, is you need to look at the other side of the table, which is ICE. Internal combustion engines will probably become more expensive because there'll be less demand for them, and therefore, they won't have the leverage of volume over time.Not only that, when they need to hit Euro 7 or China 7 or some of these other new regulations, they're going to have to make big investments in ICE at the same time as making big investments in BEV and that becomes a drag as well. And as ICE has seen as old technology, then the residual values of ICE cars is probably going to reduce, which makes it higher for them to offer that in subscription-based ownership, whereas BEV cars are probably going to hold the residual value higher because it's a new technology, and therefore, subscription-based ownership becomes a lot cheaper on that.You add all that together and you say, wow, we're really in the middle of transition here, who's brave enough and bold enough to make the decisions for the future. Despite the high lithium costs that we're facing right now, we just think we have a good strategy for the future.But to your earlier point, we're not quite ready to lay that out on a month-by-month basis towards that mid-decade ambition.

[Ronojoy Banerjee, executive]

We have about less than 10 minutes now. So we'll take a few more questions. This one comes in from Tobias Beith, analyst at Redburn. You mentioned raw materials still being a headwind in 2023. Can you remind analysts what the typical time lag is on your contracts for both non-battery cell materials like steel and cathode, and precursors like lithium?

[Johan Ekdahl, executive]

I would say, it's hard to say very generic, because it varies between different raw materials and different contracts. There are both indexation that is more based on the spot prices on a quarterly basis or on a yearly basis. So that's why, in total, there is a certain lag. And there are some raw materials that are actually indexed annually, which means that we are still in some cases, suffering from prices in the first half of 2022, whereby we have seen the benefits of other raw materials already in the second half of 2022. So it's very difficult to say a very generic answer.

[Ronojoy Banerjee, executive]

Let's take another caller, Hampus from Handelsbanken. And if you could please restrict your questions to just 2, so that we can get 1 or 2 more after that.

[Hampus Engellau, analyst]

Two questions for me. Just a clarification on your outlook. Jim, do you think that supply will determine your sales this year? Or will it be the demand? You've been supply constrained for all -- last year. So it would be interesting to pick your brain on that. And second question is on the lead times. What lead times are we looking at here today between order and delivery? And how has that changed if you look back to 1 year? Those are my questions.

[Johan Ekdahl, executive]

Yes. So supply -- I think we'll still see some supply chain disruptions this year. We're still -- I think we'll still end the year with almost the same backlog as we've started the year. So I don't think we'll make a headwind to that in 2023. And then, hopefully, I would like to reduce that order book because, when we reduce the order book, it suggests then we have a smaller lead time to our customers. But this year, I think we're going to still be somewhat supply constrained. So demand is incredibly high.The order book is incredibly high, especially for BEV. And some of those raw materials, especially the likes of semiconductors, are much more geared towards BEV production than other production. So that's really, I think, going to be -- that's going to be the chokepoint for us towards that.Now having said that, we still see tremendous growth this year, year-over-year because a lot of that is freeing up, but it won't free up fully.

[Ronojoy Banerjee, executive]

You had another question on lead times?

[James Rowan, executive]

Yes. And the lead times is -- of course, varies between models and markets. But I would say it's still long. So I would say 6 to 9 months, or at least, I think, a little bit depending on which car, of course, which market.

[Ronojoy Banerjee, executive]

This question comes in from Marcus [ Winkler ]. How will you be able to approach and manage the complexity of software-defined vehicles? And what effect will it have on your organization, partnerships and even on margins? So Jim, maybe I turn to you.

[James Rowan, executive]

Yes. One of the things that we spend a lot of time and attention on is where do we build versus what do we buy. And I think that's one of the critical parts when you're in this transition and you're trying to figure out exactly where you should be spending your engineering dollars, and what's essential for us to drive differentiation in the product and what do we need to own. So software is part of that. Of course, it's a lot wider than software. So we've decided that the electrical propulsion system for us is important. So we make our own e-motors. We make our own inverters. We now will very shortly be making our own batteries, our own battery management system, which is a software layer that sits on top of that, to get all of the best performance from that propulsion system.So we invest heavily in that software. We're also investing in the software that drives the silicon to the application layer. So we buy in the silicon from NVIDIA. As you know, we buy in the silicon from Qualcomm on the infotainment stack. But we build the software, for example, for all of our safety systems, so Xansa a wholly owned subsidiary of us.We have over 700, 800 people working just in that software alone. And we think that drives differentiation in the product, and that allows us the freedom to make the changes that we think we need to make without being reliant on software supplies.But we also buy in some software. We buy in software from the likes of Google and Apple in terms of Android Auto and Apple CarPlay, because we think that gives our customers one of the things that they want, which is to be able to connect the cell phone, the smartphone with their cars.Of course, we also have the Volvo OS, the operating system for Volvo, should they want to use the Volvo system, but we're giving them those choices, and we're constantly making these make versus buy decisions.So far, I think by and large, we've got that pretty much right. And -- but that's going to be a continued journey. And that's how really understanding the software to silicon layer is where we were investing a lot of our time, especially as we take the range towards further core computer architecture.

[Ronojoy Banerjee, executive]

And another follow-up from him was, how will it impact our margins and our balance sheet when we make these sorts of investments?

[James Rowan, executive]

Yes. Well, we have meaningful technology within the car hardware and software. When I say [ that ], I should also mention that software is not just inside the car. The software is also the connectivity into the cloud as well as into the application later on your iPhone. So that you have a Volvo app, which is meaningful and helpful and you can unlock the key, you can use it as a digital key. And that we can connect with our customers directly through the Volvo app in a meaningful way. So we take it all the way from the customer engagement, all the way through from the silicon layer, and then, of course, into the application layer and some of the embedded software and the [ laser ] batteries and so on.

[Johan Ekdahl, executive]

If you can create that meaningful differentiation in your product, then, of course, you can provide a premium product, which people are prepared to pay more for, and therefore, it helps your gross margin structure. And that's basically the strategy.

[Ronojoy Banerjee, executive]

Maybe we take our final caller then. This is [ Tim Rose ] from Bar Media. Tim, maybe if you could restrict to just one question, please?

[Unknown Analyst]

Question for Jim. On the U.K. direct-to-consumer agency rollout, how will you measure it's success? How will you deem it a success? And when do you kind of expect that to be? And secondly, will you be doing similar in other markets?

[James Rowan, executive]

Yes. So, to take the first question, first in terms of the U.K. so that will happen. We'll get to that filled, let's call it, U.K. direct model by the end of this year. How we measure that will really be our engagement with our customers. And that's the -- so this is really the point that we're trying to change. It seems strange for me coming from the consumer electronics and technology industry that you can sell a product which is $40,000, $50,000, $60,000 of value, to a customer that you never speak to. You never speak to pre-sales and you never speak to post-sales.For me, that's a fluid business model, especially in today's world when we've got so much connectivity at our fingertips. And so, we need to be part of that conversation. Now, whether that customer researches online and buys online or whether that customer researches online and buys a dealership, or whether they just go straight to the dealership because they want to try to test drive, sctually, I don't really care.What I care about is that every single touch point within that, that we get connected with our customer. And so, if you go to a dealership, you're still buying from volvo.com and we are still part of that conversation. And then that gives us access to that customer, that customer data. And then -- and of course, it gives us a much better chance of continual engagement with that customer to find out what they like about the product, what they don't like about the product, and hopefully keeping them as a lifelong customer.And as they trade up, maybe they come in at the small SUV. As their life changes and they have kids or they move to the country, they need a second car, we're constantly going to be part of that conversation, and that's really the big measure of success.

[James Rowan, executive]

Second part, sorry, what was that?

[Ronojoy Banerjee, executive]

The second part was other markets that would follow after U.K.?

[James Rowan, executive]

Yes. So far, we have the U.K. as the front runner, and then we're going to take us -- We're going on so much from that U.K. flip. And I think it would benefit us to say, okay, let's see what we learned here. Let's take a beat what worked, what didn't work and how we change that for the next market. So U.K. is definitely a lead market.

[Ronojoy Banerjee, executive]

All right. Hopefully, that answers your question. We really need to wrap up this live stream, but our media lines are open. So please reach us if you have follow-up questions. You can reach the Investor Relations team as well. But we need to wrap up for the day. Thank you for all your questions and engagement. Jim, Johan, John, pleasure. That's all from us. Have a great day. Bye.